Public–private partnership

Depiction of the various levels of private-sector involvement in public private partnerships. Source: Brookings Institution

A public–private partnership (PPP, 3P or P3) is a cooperative arrangement between two or more public and private sectors, typically of a long-term nature.[1][2] Governments have used such a mix of public and private endeavors throughout history.[3][4] However, the late 20th century and early 21st century[when?] have seen a clear trend towards governments across the globe making greater use of various PPP arrangements.[1][2]

PPPs are best seen as a special kind of contract involved in infrastructure provision, such as the building and equipping of schools, hospitals, transport systems, water and sewerage systems.[5]

There is no consensus about how to define a PPP.[6] PPPs can be understood of both as a governance mechanism and a language game.[1] When understood as a language game, or brand, the PPP phrase can cover hundreds of different types of long term contracts with a wide range of risk allocations, funding arrangements and transparency requirements. And as a brand, the PPP concept is also closely related to concepts such as privatization and the contracting out of government services.[1][6] When understood as a governance mechanism the PPP concept encompasses at least five families of potential arrangements, one of which is the long term infrastructure contract in the model of the UK's Private Finance Initiative (PFI).[1][6][7] Particular types of arrangements have been favored in different countries at different times.

Infrastructure PPPs as a phenomenon can be understood at five different levels: as a particular project or activity, as a form of project delivery, as a statement of government policy, as a tool of government, or as a wider cultural phenomenon.[8] Different disciplines commonly emphasize different aspects of the PPP phenomena.[8] The engineering and economics professions primarily take a utilitarian, functional focus emphasising concerns such as project delivery and relative value-for-money (VfM) compared to the traditional ways of delivering large infrastructure projects. In contrast, public administrators and political scientists tend to view PPPs more as a policy brand, and as a useful tool for governments to achieve their objectives.

Common themes of PPPs are the sharing of risk and the development of innovative, and a way of financing over a long-term for the public and private sectors.[8] The use of private finance is another key dimension of many PPPs, particularly those influenced by the UK PFI model, although this aspect has waned since the global financial crisis of 2008.[8]
The PPP phenomenon has been controversial. The lack of a shared understanding of what a PPP is makes the process of evaluating whether PPPs have been successful complex.[8] Evidence of PPP performance in terms of VfM and efficiency, for example, is mixed and often unavailable.[8][8]

According to Weimer and Vining, "A P3 typically involves a private entity financing, constructing, or managing a project in return for a promised stream of payments directly from government or indirectly from users over the projected life of the project or some other specified period of time".[9] Because P3s are directly responsible for a variety of activities, as indicated by Weimer and Vining, P3s can evolve into monopolies motivated by rent-seeking behavior(s).

Contents

PPPs often involve a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In some types of PPP, the cost of using the service is borne exclusively by the users of the service and not by the taxpayer.[10][2]In other types (notably the PFI), capital investment is made by the private sector on the basis of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government. Government contributions to a PPP may also be in kind (notably the transfer of existing assets). In projects that are aimed at creating public goods like in the infrastructure sector, the government may provide a capital subsidy in the form of a one-time grant, so as to make the project economically viable. In some other cases, the government may support the project by providing revenue subsidies, including tax breaks or by guaranteed annual revenues for a fixed time period. In all cases, the partnerships include a transfer of significant risks to the private sector, generally in an integrated and holistic way, minimizing interfaces for the public entity. An optimal risk allocation is the main value generator for this model of delivering public service.

There are many drivers for PPPs[2][11]. One common driver involves the claim that PPPs enable the public sector to harness the expertise and efficiencies that the private sector can bring to the delivery of certain facilities and services traditionally procured and delivered by the public sector.[12] Another common driver is that PPPs may be structured so that the public sector body seeking to make a capital investment does not incur any borrowing. Rather, the PPP borrowing is incurred by the private sector vehicle implementing the project. On PPP projects where the cost of using the service is intended to be borne exclusively by the end user, the PPP is, from the public sector's perspective, an "off-balance sheet" method of financing the delivery of new or refurbished public sector assets. On PPP projects where the public sector intends to compensate the private sector through availability payments once the facility is established or renewed, the financing is, from the public sector's perspective, "on-balance sheet"; however, the public sector will regularly benefit from significantly deferred cash flows. Generally, financing costs will be higher for a PPP than for a traditional public financing, because of the private sector higher cost of capital. However, extra financing costs can be offset by private sector efficiency, savings resulting from a holistic approach to delivering the project or service, and from the better risk allocation in the long run.

Typically, a private sector consortium forms a special company called a "special purpose vehicle" (SPV) to develop, build, maintain and operate the asset for the contracted period.[10][13] In cases where the government has invested in the project, it is typically (but not always) allotted an equity share in the SPV.[14] The consortium is usually made up of a building contractor, a maintenance company and equity investor(s). It is the SPV that signs the contract with the government and with subcontractors to build the facility and then maintain it. In the infrastructure sector, complex arrangements and contracts that guarantee and secure the cash flows make PPP projects prime candidates for project financing. A typical PPP example would be a hospital building financed and constructed by a private developer and then leased to the hospital authority. The private developer then acts as landlord, providing housekeeping and other non-medical services while the hospital itself provides medical services.[10]

Pressure to change the standard model of public procurement arose initially from concerns about the level public debt, which grew rapidly during the macroeconomic dislocation of the 1970s and 1980s. Governments sought to encourage private investment in infrastructure, initially on the basis of accounting fallacies arising
from the fact that public accounts did not distinguish between recurrent and capital expenditures.

The idea that private provision of infrastructure represented a way of providing infrastructure at no cost to the public has now been generally abandoned; however, interest in alternatives to the standard model of public procurement persisted. In particular, it has been argued that models involving an enhanced role for the private sector, with a single private-sector organization taking responsibility for most aspects of service provisions for a given project, could yield an improved allocation of risk, while maintaining public accountability for essential aspects of service provision.

Initially, most public–private partnerships were negotiated individually, as one-off deals, and much of this activity began in the early 1990s in the UK.

PPPs are organized along a continuum between public and private nodes and needs as they integrate normative, albeit separate and distinct, functions of society—the market and the commons. A common challenge for PPPs is allowing for these fluctuations and reinforcing the intended partnership without diminishing either sector. Multisectoral, or collaborative, partnering is experienced on a continuum of private to public in varying degrees of implementation according to the need, time restraints, and the issue at hand. Even though these partnerships are now common, it is normal for both private and public sectors to be critical of the other's approach and methods. It is at the merger of these sectors that we see how a unified partnership has immediate impact in the development of communities and the provision of public services.

The federal conservative government under Stephen Harper in Canada solidified its commitment to P3s with the creation of a crown corporation, P3 Canada Inc., in 2009. The Canadian vanguards for P3s have been provincial organizations, supported by the Canadian Council for Public–Private Partnerships established in 1993 (a member-sponsored organization with representatives from both the public and the private sectors). As a proponent of the concept of P3s, the Council conducts research, publishes findings, facilitates forums for discussion and sponsors an Annual Conference on relevant topics, both domestic and international. Each year the Council celebrates successful public–private partnerships through the National Awards Program held concurrently with the annual conference in November.

At lower levels of government P3s have been used to build major infrastructure projects like transit systems, such as Viva Rapid Transit and Ontario Highway 407, and to build public buildings such as schools.

There are more than 14,000 existing P3 projects in China, totaling $2.7 trillion in aggregate value, according to the finance ministry[15][16].

The municipal government of Shantou, China signed a 50-billion RMB PPP agreement with the CITIC group to develop a massive residential project spanning an area of 168 square kilometers, locating on the southern district of the city's central business district.[17] The project includes real estate development, infrastructure construction including a cross-harbor tunnel, and industry developments. The project, named Shantou Coastal New Town, aims itself to be a high-end cultural, leisure, business hub of the East Guangdong area.

Muhammad Ali utilized "concessions" in the early 1800s to obtain public works for minimal cost while the concessionaires' companies made most of the profits from projects such as railroads and dams.[18]

A study, conducted by the European Court of Auditors of the European Union, examined 12 public-private partnerships in France, Greece, Ireland and Spain, in road transport and information and communications technology. It concluded that the partnerships were characterized by “widespread shortcomings and limited benefits” and underlined “considerable inefficiencies in the
form of delays during construction and major cost increases”[19].

The Government of India defines a P3 as "a partnership between a public sector entity (sponsoring authority) and a private sector entity (a legal entity in which 51% or more of equity is with the private partner/s) for the creation and/or management of infrastructure for public purpose for a specified period of time (concession period) on commercial terms and in which the private partner has been procured through a transparent and open procurement system."[20]

The union government has estimated an investment of $320 billion in infrastructure in the 10th plan.[21] The major infrastructure development projects in the Indian state of Maharashtra (more than 50%) are based on the P3 model. In the 2000s, other states such as Karnataka, Madhya Pradesh, Gujarat and Tamil Nadu also adopted this model. Sector-wise, road projects account for about 53.4% of the total projects in numbers, and 46% in terms of value. Ports come in second place and account for 8% of the total projects (21% of the total value).[22] Other sectors including power, irrigation, telecommunication, water supply and airports, have gained momentum through the P3 model. As of 2011[update], these sectors were expected to get an investment of Rs. 2,027,169 crore (according to 2006–2007 WPI).[23]. Recent failures of the major PPPs in India, such as the Tata Mundra Ultra Mega Power Project and the Khandwa Water Supply Augmentation Project, are now questioning the ability of PPPs to deliver on the Sustainable Development Goals [24].

In Japan since the 1980s, the third sector (第三セクター,daisan sekutā) refers to joint corporations invested in by both public and private sectors.

In rail transport terms, a third-sector railway line is a short line or network of lines operated by a small operating company jointly owned by a prefectural/municipal government and smaller private interests. Third-sector lines are generally former JR Group – or, before 1987, Japanese National Railways (JNR) – lines that have been divested from those larger companies.

Nowadays there are special laws about PPP in 69 subjects of Russian Federation.[27] But the biggest part of them are just declarations. Besides PPP in Russia is also regulated by Federal Law #115-FZ (21.07.2005) "On concessional agreements"[28] and Federal Law #94-FZ (21.07.2005) "On Procurement of Goods, Works and Services for State and Municipal Needs".[29] In some ways PPP is also regulated by Federal Law №116-FZ (22.07.2005) "On special economic zones"[30] (in terms of providing business benefits on special territories – in the broadest sense it is a variation of PPP).

Still all those laws and documents do not cover all possible PPP forms.[citation needed]

In February 2013 experts rated subjects of Russian Federation according to their preparedness for implementing projects via public–private partnership. The most developed region was Saint Petersburg (with rating 7.8), the least Chukotka (rating 0.0).[citation needed]

By 2013 there were almost 300 public–private partnership projects in Russia.[31]

In 1992, the Conservative government of John Major in the UK introduced the PFI,[32] the first systematic programme aimed at encouraging public–private partnerships. The 1992 programme focused on reducing the public sector borrowing requirement, although, as already noted, the effect on public accounts was largely illusory. The Labour government of Tony Blair, elected in 1997, expanded the PFI initiative but sought to shift the emphasis to the achievement of "value for money", mainly through an appropriate allocation of risk. However, it has since been found that many programs ran dramatically over budget and have not presented as value for money for the taxpayer, with some projects costing more to cancel than to complete. An in-depth study, conducted by the National Audit Office of the United Kingdom [33] concluded that the private finance initiative model had proved to be more expensive and less efficient in providing hospitals, schools and other public infrastructure than public financing.

In 2017, the State of Texas sought its first ever private partner to join in a project to renovate the G. J. Sutton Building in Downtown San Antonio near the Alamodome, according to Mike Novak, the chairman of the Texas Facilities Commission. Local governments in Texas have already entered into such partnerships including the redevelopment of the HemisFair Arena and the construction by Weston Urban of a new Frost Bank Tower in San Antonio. Named for G. J. Sutton, the first African-American elected official in San Antonio, the six-acre complex was vacated by the state in 2014 because of bat infestation and a deteriorating foundation. In 2015, GovernorGreg Abbott, counter to the wishes of MayorIvy Taylor, used his line-item veto to remove $132 million which would have funded the rehabilitation of The Sutton. The state expects to see the property used at some point in the future for office space and parking slots.[35]

In Massachusetts, arrangements to allow the state Department of Conservation and Recreation to pave over gravel utility roads under high-voltage transmission lines[37] operated by utilities have been branded by the Baker Administration and Eversource Energy as "public-private partnerships" to create alternative transportation corridors. This particular arrangement involves no financial risk to the for-profit utility. Where the utility has existing easements, they share the right-of-way. Where the utility does not have an existing easement but wishes to gain state approval for constructing new transmission lines on state property, the utility reproduces designs of rail trails in its petition to the state Energy Facilities Siting Board (EFSB). Approval would enable the utility to have construction of transmission lines and gravel utility paths fully funded through electric ratepayer bills. "Piggybacking" onto an electric 'reliability' project leverages the rights of the for-profit 'public utility' to overcome environmental and zoning bylaws which a rail trail might otherwise be subject to. The legality of steering greenfield transmission projects into environmentally sensitive conservation and wetlands, and using electric ratepayer funds for non-reliability purposes is being tested. In a related case, the Massachusetts Supreme Judicial Court ruled that electricity customers can no longer be asked to help cover the costs of building gas pipelines.

Much of the early infrastructure of the United States was built by what can be considered public-private partnerships. This includes an early steamboat line between New York and New Jersey in 1808, many of the railroads including the nation's first railroad chartered in New Jersey in 1815, and most of the modern electric grid.

From 1990 to 2009 nearly 1,400 PPP deals were signed in the European Union, representing a capital value of approximately €260 billion.[38] Since the onset of the financial crisis in 2008, estimates suggest that the number of PPP deals closed has fallen more than 40 percent.[39][40]

Investments in public sector infrastructure are seen as an important means of maintaining economic activity, as was highlighted in a European Commission communication on PPPs.[41] As a result of the significant role that PPPs have adopted in the development of public sector infrastructure, in addition to the complexity of such transactions, the European PPP Expertise Centre (EPEC) was established to support public-sector capacity to implement PPPs and share timely solutions to problems common across Europe in PPPs.[42]

PPPs provide a unique perspective on the collaborative and network aspects of public management. The advancement of PPPs, as a concept and a practice, is a product of the new public management of the late 20th century and globalization pressures. The term "public–private partnership" is prey to thinking in parts rather than the whole of the partnership, which makes it difficult to pin down a universally accepted definition of PPPs.

U.S. city managers' motivations for exploring public–private service delivery vary. According to a 2007 survey, two primary reasons were expressed: cost reduction (86.7%) and external fiscal pressures, including tax restrictions (50.3%). No other motivations expressed exceeded 16%. In the 2012 survey, however, interest had shifted to the need for better processes (69%), relationship building (77%), better outcomes (81%), leveraging resources (84%), and belief that collaborative service delivery is "the right thing to do" (86%). Among those surveyed, the provision of public services through contracts with private firms peaked in 1977 at 18% and has declined since. The most common form of shared service delivery now involves contracts between governments, growing from 17% in 2002 to 20% in 2007. "At the same time, approximately 22% of the local governments in the survey indicated that they had brought back in-house at least one service that they had previously provided through some alternative private arrangement."[43]

A common problem with PPP projects is that private investors obtained a rate of return that was higher than the government's bond rate, even though most or all of the income risk associated with the project was borne by the public sector.[40]The UK Parliament report [44]underlines that some private investors have made large returns from PPP deals, suggesting that departments are overpaying for transferring the risks of projects to the private sector, one of the Treasury’s stated benefits of PPP.

A 2008 report by PriceWaterhouseCoopers argued that the comparison between public and private borrowing rates is not fair, because there are "constraints on public borrowing", which may imply that public borrowing is too high, and so PFI projects can be beneficial by not putting debt directly on government books.[45] The fact that PPPs debt is not recorded as debt and remains largely "off balance sheet" has become a major concern. Indeed, keeping the PPP project and its contingent liabilities ‘off balance sheet,’ means that the true cost of the project is hidden[46]. According to the IMF, economic ownership of the asset should determine whether to record PPP-related assets and liabilities in the government’s or the private corporation’s balance sheet is not straightforward[47]. According to a UN Report [48], "in terms of costs, private finance is more expensive than public finance, and public-private partnerships can also incur high design, management and transactional costs due to their complexity and the need for external advice [49]. In addition, negotiations on issues other than traditional procurement can cause project delays of some years [50].

A number of Australian studies of early initiatives to promote private investment in infrastructure concluded that, in most cases, the schemes being proposed were inferior to the standard model of public procurement based on competitively tendered construction of publicly owned assets.[51] In 2009, the New Zealand Treasury, in response to inquiries by the new National Party government, released a report on PPP schemes that concluded that "there is little reliable empirical evidence about the costs and benefits of PPPs" and that there "are other ways of obtaining private sector finance", as well as that "the advantages of PPPs must be weighed against the contractual complexities and rigidities they entail".[52]

One response to these negative findings was the development of formal procedures for the assessment of PPPs in which the focus was on "value for money" rather than reductions in debt. The underlying framework was one in which value for money was achieved by an appropriate allocation of risk. These assessment procedures were incorporated in the private finance initiative and its Australian counterparts from the late 1990s onwards.[citation needed] Another model being discussed is the public–private community partnership (PPCP), in which both the government and private players work together for social welfare, eliminating the prime focus of private players on profit.[citation needed] This model is being applied more in developing nations such as India.[citation needed]

Clarence N. Stone frames the public private partnership as 'governing coalitions'. In Regime Politics Governing Atlanta 1946–1988, he specifically analyzes the 'crosscurrents in coalition mobilization'. Government coalitions are revealed as susceptible to a number of problems primarily corruption and conflicts of interests. This slippery slope is generally created by a lack of sufficient oversight.[53] Corruption and conflicts of interests, in this case, leads to costs of opportunism; other costs related to P3's are production and bargaining costs.[54]

After a wave of privatisation of many water services in the 1990s, mostly in developing countries, experiences show that global water corporations have not brought the promised improvements in public water utilities. Instead of lower prices, large volumes of investment and improvements in the connection of the poor to water and sanitation, water tariffs have increased out of reach of poor households. Water multinationals are withdrawing from developing countries and the World Bank is reluctant to provide support.[55]

The privatisation of the water services of the city of Paris was proven to be unwanted and at the end of 2009 the city did not renew its contract with two of the French water corporations, Suez and Veolia.[56][57] After one year of being controlled by the public, it is projected that the water tariff will be cut by between 5% and 10%.[58]

Contract management is a crucial factor in shared service delivery, and services that are more challenging to monitor or fully capture in contractual language often remain in municipal control. In the 2007 survey of U.S. city managers, the most difficult was judged to be the operation and management of hospitals, and the least difficult the cleaning of streets and parking lots. The study revealed that communities often fail to sufficiently monitor collaborative agreements or other forms of service delivery: "For instance, in 2002, only 47.3% of managers involved with private firms as delivery partners reported that they evaluate that service delivery. By 2007, that was down to 45.4%. Performance monitoring is a general concern from these surveys and in the scholarly criticisms of these arrangements."[43][59]

A health services PPP can be described as a long-term contract (typically 15–30 years) between a public-sector authority and one or more private sector companies operating as a legal entity. The government provides the strength of its purchasing power, outlines goals for an optimal health system, and empowers private enterprise to innovate, build, maintain and/or manage delivery of agreed-upon services over the term of the contract. The private sector receives payment for its services and assumes substantial financial, technical and operational risk while benefitting from the upside potential of shared cost savings.

For more than two decades public–private partnerships have been used to finance health infrastructure. Governments are increasingly looking to the PPP-model to solve larger problems in healthcare delivery. There is not a country in the world where healthcare is financed entirely by the government.[citation needed] While the provision of health is widely recognized as the responsibility of government, private capital and expertise are increasingly viewed as sources to induce efficiency and innovation. As PPPs move from financing infrastructure to managing care delivery, there is an opportunity to reduce overallcost of healthcare.

The larger scope of health PPPs to manage and finance care delivery and infrastructure means a larger potential market for private organizations. PricewaterhouseCoopers projects that spending on healthcare among the Organisation for Economic Co-operation and Development (OECD) and BRIC nations of Brazil, Russia, India and China will grow by 51 percent between 2010 and 2020, amounting to a cumulative total of more than $71 trillion.[60] Of this, $3.6 trillion is projected to be spent on health infrastructure and $68.1 trillion will be spent on non-infrastructure health spending cumulatively over the next decade. Annually, spending on health infrastructure among the OECD and BRIC nations is projected to increase to $397 billion by 2020, up from $263 billion in 2010. The larger market for health PPPs is projected to be in non-infrastructure spending, estimated to be more than $7.5 trillion annually, up from $5 trillion in 2010.[60]

Health spending in the United States accounts for approximately half of all health spending among OECD nations, but the biggest growth will be outside of the U.S. According to PwC projections, the countries that are expected to have the highest health spending growth between 2010 and 2020 are China, where health spending is expected to increase by 166 percent, and India, which will see a 140 percent increase. As health spending increases it is putting pressure on governments and spurring them to look for private capital and expertise.[60]

Product development partnerships (PDPs) are a class of public–private partnerships that focus on pharmaceutical product development for diseases of the developing world. These include preventive medicines such as vaccines and microbicides, as well as treatments for otherwise neglected diseases. PDPs were first created in the 1990s to unite the public sector's commitment to international public goods for health with industry's intellectual property, expertise in product development, and marketing.

International PDPs work to accelerate research and development of pharmaceutical products for underserved populations that are not profitable for private companies. They may also be involved in helping plan for access and availability of the products they develop to those in need in their target populations. Publicly financed, with intellectual property rights granted by pharmaceutical industry partners for specific markets, PDPs are able to focus on their missions rather than concerns about recouping development costs through the profitability of the products being developed. These not-for-profit organizations bridge public- and private-sector interests, with a view toward resolving the specific incentive and financial barriers to increased industry involvement in the development of safe and effective pharmaceutical products.

International product development partnerships and public–private partnerships include:

The Roll Back Malaria (RBM) Partnership was founded in 1998. RBM is the global framework for coordinated action against malaria. It forges consensus among key actors in malaria control, harmonises action and mobilises resources to fight malaria in endemic countries.

The Drugs for Neglected Diseases Initiative (DNDi) was founded in 2003 as a not-for-profit drug development organization focused on developing novel treatments for patients suffering from neglected diseases.

The International AIDS Vaccine Initiative (IAVI), a biomedical public–private product development partnership (PDP), was established in 1996 to accelerate the development of a vaccine to prevent HIV infection and AIDS. IAVI is financially supported by governments, multilateral organizations, and major private-sector institutions and individuals.

Medicines for Malaria Venture (MMV) is a not-for-profit drug discovery, development and delivery organization, established as a Swiss foundation in 1999, based in Geneva. MMV is supported by a number of foundations, governments and other donors.

The TB Alliance is financed by public agencies and private foundations, and partners with research institutes and private pharmaceutical companies to develop faster-acting, novel treatments for tuberculosis that are affordable and accessible to the developing world.

A UN agency, the World Health Organization (WHO), is financed through the UN system by contributions from member states. In recent years, WHO's work has involved more collaboration with NGOs and the pharmaceutical industry, as well as with foundations such as the Bill and Melinda Gates Foundation and the Rockefeller Foundation. Some of these collaborations may be considered global public–private partnerships (GPPPs); 15% of WHO's total revenue in 2012 was financed by private foundations.[61]

The United Nations Foundation & Vodafone Foundation Technology Partnership, a five-year, $30 million commitment, leverages the power of mobile technology to support and strengthen humanitarian work worldwide. Partners include the World Health Organization (WHO), DataDyne, the mHealth Alliance, the World Food Program (WFP), Telecoms Sans Frontieres, and the UN Office for the Coordination of Humanitarian Affairs (OCHA).

The United Nations International Strategy for Disaster Reduction (UNISDR) is part of the United Nations Secretariat and its functions span the development and humanitarian fields. Public–private partnerships for disaster management bring together the private sector for PPP models with a tool box of partnership opportunities towards resilience, capacity building, and sustainability goals.[62]

The public–private partnership for improving teaching and learning in schools in Abu Dhabi, United Arab Emirates.

A key motivation for governments considering public–private partnerships is the possibility of bringing in new sources of financing for funding public infrastructure and service needs.[40] It is important to understand[opinion] the main mechanisms for infrastructure projects, the principal investors in developing countries, sources of finance (limited recourse, debt, equity, etc.), the typical project finance structure, and key issues arising from developing project financed transactions.[63] An interesting aspect,[opinion] quite ubiquitous in project finance, is the dual nature of the parties involved, being both service providers to and contracted with the newly created entity (Special purpose entity), and shareholders of that entity. For example, it is quite common for the construction contractor or operations and maintenance service provider to hold an equity stake in a project finance's capital structure.[64] Some governments utilize a public sector comparator for assessing the financial benefit of a public–private partnership and the optimal level of private sector involvement.

A number of key risks need to be taken into consideration as well. These risks will need to be allocated and managed to ensure the successful financing of the project. The party that is best placed to manage these risks in a cost-effective way may not necessarily always be the private sector. However, there are a number of mechanisms products available in the market for project sponsors, lenders and governments to mitigate some of the project risks, such as: Hedging and futures contracts; insurance; and risk mitigation products provided by international finance institutions.[65] In designing such risk-hedging mechanisms, it is more difficult to address the risks of developing countries' infrastructure markets as their markets involve higher risks.[66]

The World Bank (2007)[67] states that governments tend to create Centralised PPP Units as a response to weaknesses in the central government's ability to effectively manage PPP programmes. Different governments suffer from different institutional failures in the PPP procurement process, hence these Centralised PPP units need to address these different issues by shaping their functions to suit the individual government needs. The function, location (within government) and jurisdiction (i.e. who controls it) of dedicated PPP Units may differ amongst countries, but generally these include:

Policy guidance and advice on the content of national legislation. Guidance also includes defining which sectors are eligible for PPPs as well as which PPP methods and schemes can be carried out.

Approving or rejecting proposed PPP projects i.e. playing a gatekeeper role that can occur at any stage of the process i.e. at the initial planning stage or at the final approval stage.

Providing technical support to government organisations at the project identification, evaluation, procurement or contract management phase.

Capacity building i.e. training of public sector officials that are involved in PPP programmes or are interested in the PPP process.

A 2013 review[68] which targeted research based on the value of centralised PPP Units (and does not look at the value of PPPs in general or any other type of PPP arrangement as the review was aimed at providing evidence needed to decide whether or not to set up a Centralised PPP Unit) found-

No quantitative evidence: There is very little quantitative evidence of the value of centralised PPP coordination units against ministries or government agencies individually procuring PPP projects. Most of the studies available on PPP Units tend to focus on their role and only carry out brief descriptive analyses of their value.

Limited Authority: The majority of the PPP Units reviewed in the literature do not play a particularly important role in approving or rejecting PPP programmes or projects. Whilst their advice is used in the decision making process by other government bodies, the majority do not actually have any executive power to make such decisions themselves. Hence, when they have more authority their value is seen to be higher.

PPP Units differ by country and sector: Government failures, in regards to PPP units, vary by government. The requirements for PPPs also vary by country and sector and so do the risks involved (i.e. financial, social etc.) for the country government. Hence, PPP Units need to be tailored to solve these failures, properly assess risks and be located in the correct government departments where it can command the most power. PPP Units can play a number of important roles in the PPP process; however, not all PPP Units will play the same role as their functions have been tailored to individual country needs. In some cases, limits to their authority have curtailed their effectiveness.

Implicit value: The lack of rigorous evidence does not prove that PPP Units are not an important contributor to the success of a country's PPP programme. The literature review does show that whilst there is no quantitative data, there are widespread perceptions on the importance of a well-functioning PPP unit for the success of a country's PPP programme.

The author of the 2013 review[68] found no literature that rigorously evaluates the usefulness of PPP Units. The literature does show that PPP Units should be individually tailored to different government functions, address different government failures and be appropriately positioned to support the country's PPP Programme. Where these conditions seem to have been met, there is consensus that PPP Units have played a positive role in national PPP Programmes.

In Canada, public–private partnerships have become significant in both social and infrastructure development. PPP Canada Inc. was created as a Crown corporation with an independent board of directors reporting through the Minister of Finance to Parliament. Its mandate is to improve the delivery of public infrastructure by achieving better value, timeliness and accountability to taxpayers, through P3s. The Corporation became operational in February 2009 with the appointments of a chair of the board of directors and a chief executive officer.

In the UK, two-thirds of the London Underground PPP was taken back into public control in July 2007 after only four and a half years at an estimated cost of £2 billion and the remaining one-third was taken back into public control in May 2010 after seven and a half years for a purchase price of £310 million.[71] The government had paid advisers £180 million for structuring, negotiating and implementing the PPP and had reimbursed £275 million of bid costs to the winning bidders.[72] The 30-year PPP contract for the refurbishment of the MOD Main Building in London was estimated to give a saving of £100,000 as compared to the £746.2 million cost of public procurement.[73] The refinancing of the Fazakerley Prison PFI contract following the completion of construction delivered an 81% gain to the private sector operator.[74] The NATS PPP saw 51% of the UK's air traffic control service transferred to the private sector; however, following the decline in air traffic after the September 11 attacks, the government and BAA Limited each invested £65 million in the private sector operator in 2003.[75]

In Newfoundland Robert Gillespie Reid contracted to operate the railways for fifty years from 1898, though originally they were to become his property at the end of the period.

In New York, during the Robert Moses era, public private partnership ran rampant.[opinion] PPPs during this period were best described and known as public authorities; for example, the Triborough Bridge and Tunnel Authority, Henry Hudson Parkway Authority, and the Port Authority. Moses manipulated various public authorities, either seeking their success of failure, in order to gain political power[76] More recently, the new Governor Mario M. Cuomo Bridge and the Javits Center are considered public-private partnerships.[77]

San Diego has entered into numerous PPP agreements. "San Diego has used P3s more extensively and, with Petco Park, on a larger scale than is typical of cities elsewhere".[78] One explanation for San Diego's propensity towards P3 agreements is "...local residents refuse to tax themselves to pay for public benefits and prefer private-sector actors to take the lead...".[78] "...tax shares are usually linear functions of property values..., jurisdictions have an incentive to try to exclude those who would have below-average property values. The incentive leads to such local policies as minimum lot sizes, restrictions on multiple-unit dwellings, and restrictive building codes...One social cost if these policies is a reduction in housing opportunities for low- and middle-income families"[79]

A 2013 study published in State and Local Government Review found that definitions of public–private partnerships vary widely between municipalities: "Many public and private officials tout public–private partnerships for any number of activities, when in truth the relationship is contractual, a franchise, or the load shedding of some previously public service to a private or nonprofit entity." A more general term for such agreements is "shared service delivery" — municipalities joining together, with private firms, or with nonprofits to provide services to citizens.[43][59]

In economic theory, public–private partnerships have been studied through the lens of contract theory. The first theoretical study on PPPs has been conducted by Oliver Hart.[80] From an economic theory perspective, what distinguishes a PPP from traditional public procurement of infrastructure services is the fact that the building and operating stages are bundled in the case of PPPs. Hence, the private firm has strong incentives in the building stage to make investments with regard to the operating stage. These investments can be desirable but may also be undesirable (e.g., when the investments not only reduce operating costs, but also reduce service quality). Hence, there is a trade-off and it depends on the particular situation whether a PPP or traditional procurement is to be preferred. Hart's model has been extended in several directions. For instance, authors have studied various externalities between the building and operating stages,[81] insurance when firms are risk-averse,[82] and implications of PPPs for incentives to innovate and gather information.[83]

Public–private partnerships have seen a large increase over the years in part because local and state governments rely heavily on the growing number of non-profits to provide many public services that they cannot.[84] Entering into a public–private partnership can be rewarding as well as destructive if not done with caution and education. Partnerships need balance from both parties as well as continuous maintenance. If entered into lightly, one can find its organization falling in various areas proving to be one of many partnership failures.[85]

Flexibility between the two partners as the contract and staff involved throughout the process: If one party feels they are losing some of the control they may work on adopting more rules and regulations throughout the process instead of working together to be flexible and mediate an issue.[85]

Timeline: Non-profits are working on a long-term timeline. Many of their goals can only be achieved with long-term commitment; this is where their focus will lie. For-profit organizations are more short-term oriented because of short-term goals focusing primarily on profitability. Finally, government agencies' timeline depends a lot on election timelines and therefore can change regularly.[86]

Focus of the project: Partners may not have the same focus when entering into a partnership even though they think they might.

Funding priorities: When parties cannot agree on where funding should go this can sometimes lead to losses in time, resources, and the overall funding for the project.[85] Funding priorities for government bodies looks typically at where the public's funds were spent in relation to the contract made. This then typically is looked at as in how many hours of participations, forms filled out, meals served, etc.[84] Neighborhood organizations or small and local non-profits saw a broad source of funding during the early years but there has been a shift in funding more recently reducing the overall funding and seeing more of it go to larger agencies focusing on large grants.

Accountability: With the rise in public–private partnerships there is also a rise in the responsibility that the non-profits tend to hold. With the government relying on many more of these organizations to provide the public services they cannot it is also proving difficult for the government to hold these non-profits responsible.[84] When responsibilities are not set to the letter this can cause some in managerial positions to take the back seat, seeing their counterparts taking the initiative to get tasks done. This leaves an unbalance of work and sometimes those with the most skills are not doing the job. This can also be brought on by undermanagement causing more problems such as a lack of focus for the projects, mismanaged funding, and miscommunication.[85] Too many projects and partnerships can also lead to a lack of accountability. When there are too many tasks they seem to all fall short of the hoped perfection.[85] Some partners may be taking over roles of others because accountability has not been well defined. This can also lead to some taking advantage of others when they note the any weakness. This can cause a distrustful partnership.[87]

Communication or understanding: One of the largest issues that can be discussed, communication can be a huge downfall and can contribute to many of the other risks within partnerships. It can be said that when entering into a cross-sector partnership it is difficult to understand and collaborate due to the diversity and differing languages spoken amongst the sectors. Items like performance measures, goal measurements, government regulations, and the nature of funding can all be interpreted differently thus causing blurred lines of communication.[85]

Autonomy within the partnership: While working together is important it is still a strength to be able to work on parts of the project alone, take initiative when needed, and keep some individualism throughout the process. This is beginning to happen more with the privatization of public–private partnerships where the private organization may own the partnership itself and the government then keeps full responsibility for it. This keeps parts of the partnership separate for focus.[88]

Conflicts: These can arise from any of the above topics but even outside issues or forces may bring a partnership to a halt. Even though these partnerships are entered into with the best of intentions even the most trivial issues can snowball into greater conflict halting a partnership dead in its tracks.[87] Having no understanding and communication between parties can cause conflicts with use of language, stereotyping, negative assumptions, and prejudice about the other organization. These conflicts can be related to territorialism or protectionism, and a lack of commitment to working within the partnership.[89]

Possible solutions: Partnerships might not be natural for business and managers do not want to depend on others but it is possible with careful solutions.[85]

Creating an ongoing narrative about partnerships and how will these be developed, maintained, terminated. This is especially prevalent to the local and state governments who rely heavily on the non-profits for the public services.[84] A business partnership model would not be accurate or appropriate for a P3.[90] Many partnerships can be terminated early due to issues with trust and cooperation during the contract implementation process. These issues can be avoided when the organization has initial guidelines for dos and don'ts.[90]

Ensure that there is a continuous commitment with negotiations in any time of trouble and even an outline for termination procedures if necessary.[85]

Conflict resolution, outreach and organizational development are items that managers can work on and even assign specialists to each task. Creating a timeline to be followed throughout the partnership assists in mutual understanding and communication as well.[84] Assigning specialists to work with skills in communication, conflict resolution, negotiation and policy analysis cross-sector partnerships have also been able to flourish.[89]

^ See Languille, “Public-private partnerships in education and health in the global South”, p. 156;
and Germà Bel and Xavier Fageda, “What have we learned from the last three decades of empirical studies on factors driving local privatization? ”, Local Government Studies, vol. 43, No. 4 (2017), pp. 503–511

^See European Court of Auditors, Public-Private Partnerships in the EU, p. 9

House of Representatives Standing Committee on Communications Transport and Microeconomic Reform, (1997), 'Planning not Patching: An Inquiry Into Federal Road Funding', The Parliament of the Commonwealth of Australia, Australian Government Publishing Service, Canberra.

Industry Commission (1996), 'Competitive Tendering and Contracting by Public Sector Agencies', Australian Government Publishing Service, Canberra.

Iossa, Elisabetta and Martimort, David (2012). "Risk allocation and the costs and benefits of public‐private partnerships". RAND Journal of Economics43: 442–474.

Minnow, Martha and Jody Freeman (2009), Government By Contract: Outsourcing and American Democracy, Harvard U.P.